The promise of social franchising

You’ve been to a McDonald’s: each restaurant may be a little different, but every McDonald’s follows a similar recipe. There’s even a movie about the fast food franchise–evidence of our fascination with business model that holds the promise of fast growth (and eventual ubiquity!).

In a franchise operation, a network of enterprises is guided by a franchisor. Franchisees own their own business, but agree to be bound by the franchisor’s requirements, usually paying the central franchise office for the right to operate under their name as well as for inputs and supports needed to operate; in return, the franchisor shifts some investments and risks to its franchisees and, by growing its footprint, makes more money and builds its brand and knowledge base–making the franchise itself even more attractive to would-be franchisees. This self-reinforcing process lies behind the success of business format franchises like Subway.

The prospect of harnessing market forces and business principles to deliver social goods has drawn praise from many (this Forbes piece and this one from Entrepreneur are good examples of such enthusiasm). But for social goods to reach those who most need them in frontier markets, a pure profit model may not work. In healthcare and education, franchisors often must subsidize or otherwise offset costs at some point in the overall system. Should the subsidy come at the central level or through price subsidies for customers? The answer is, unsurprisingly, that it depends. And we still need to understand why some goods and services are more amenable to the franchising approach than others.

Reproductive health, as the work of Social Franchising for Health shows, has seen some notable successes. In primary health care, experience reveals that winning business models have not yet emerged. In education, several ambitious efforts are taking different paths. Across these examples, centralized support is combined with different approaches to local control and customization. We also see varied arrangements for offsetting costs that the patients or children that the franchises serve could not otherwise afford to cover.

Clearly, the role of the state is worth considering: if governments are already providing school education, a social franchise that provides better methods or curricula can reach scale by getting governments to adopt its approach. In healthcare, social insurance offers the prospect of subsidizing patient costs.

Cost subsidies and shared infrastructure aside, I’d argue that we also need to hone our analysis of franchise design in frontier markets to better understand exactly how a franchise can enable the trifecta of scale, quality, and financial sustainability.

To develop your analysis, a good starting point is the three-point test laid out by franchising guru Michael Seid when he visited our MIT class a few years ago:

  • ability to maintain brand standards at each location
  • ability to scale operations
  • ability to achieve economies of scale

By the way, Seid actually wrote the book on the topic (“Franchising for Dummies”); for more on the implications for social franchising, see his company’s site.

A second set of considerations is laid in a study by Dahlberg, a social sector consultancy, whose insights are summarized here and explored in an Innovations article. While it was completed a few years ago, the analysis still holds. For instance: there is no way for an unprofitable set of enterprises to become profitable by growing the network. Unit economics must first be feasible before a franchise makes sense. Most social entrepreneurs, the Dahlbeg experts suggested, are too impatient in seeking to get to scale too fast.

Against this backdrop, what are we to make of Aflatoun? The Amsterdam-based educational organization grew out of a program pioneered in India over the course of some ten years, but Aflatoun itself was founded in 2005, at which point the Indian program had reached 162,000 children in 1,100 schools. Within three years the organization exceeded its initial goals: pilot in 11 countries (Aflatoun had reached 20). It provides social and financial education to children, anchored in a set of children’s rights laid out by the United Nations.

In its first few years, Alfloun moved fast, refined its business model by adopting a hub-and-spoke model, launching a built-for-scale “train the trainer” program, and leveraging funding, relationships, and research to build a global knowledge base, set of partnerships, and manuals and materials that any organization or government could use for just $75 a year.

By 2010–five years after starting in one country–Aflatoun was in 41 countries. By 2014, its reach extended to 103 countries and 2 million children. At the start of 2017, it served 4.1 million children in 116 countries.

Is Aflatoun a franchise? Its central organization plays the role of a franchisor, in many ways, by establishing relationships, supporting the use and uptake of its methods and materials, and enforcing conformity with its non-negotiable core elements (see this 2016 case study).

Field research and industry experts tell us that before you even get to brand standards, operational scalability, and economies of scale, first the single unit must deliver services and products that its customers value at the price they pay. And unit performance must be measured accurately, consistently, and rapidly enough for the data to be useful to the unit’s management and to the franchisor.

If every franchisable operation must first work at the unit level before scaling, what are criteria did Aflatoun have to meet before scaling up?

Along the way, it has had to balance local customization and on-the-ground innovation on the one hand against central control and replicability on the other. Exploring these tradeoffs should help us all to understand how to design for scale and innovation.